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Impacts of Price Controls on Developing Economies

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Impacts of Price Controls on Developing Economies

Price controls refer to strategies for ensuring a fair market for all participants. They

include price ceilings that refer to the maximum price that a producer should sell a particular

commodity. Price floors refer to the minimum price an entity should sell a commodity. Price

ceiling focuses on safeguarding consumers from exploitation, while price floors protect

producers from extreme losses. Both strategies are vital in enhancing economic growth while

ensuring every entity operates fairly. Developing economies have primarily executed price

control majorly on essential commodities such as foodstuffs and petroleum products. A large

portion of the population in these countries struggle to afford these commodities, and the

government has resorted to price controls to safeguard them from updated producers. These

controls have negative impacts on the economies, and economies should consider alternative

approaches for sustainable growth.

Uses of Price Controls

Price Controls on goods and services

Developing and emerging economies both employ price controls. These controls are

often dominant in emerging markets than developed markets, particularly for energy and food-

linked commodities. While price control is often restrictive in developing economies than in

developed economies, controls differ across different economies (Guénette, 2020). Among

emerging markets, price controls are dominant in low-income countries. Price controls are

majorly imposed on energy, foods, and construction materials. All emerging markets impose

price controls on energy products. Besides, these economies impose controls on basic foodstuffs.

Governments employ price controls to ensure that producers sell goods and services at

fair or affordable prices. These controls are aimed at safeguarding consumers from exploitation
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caused by extreme commodity prices. The free market operates smoothly with diverse updated

clients acquiring commodities from different sellers who can establish a reputation for low or

high-quality items (Rockoff, 2018). The market price is often fair because of competition among

buyers and producers. Nevertheless, there are instances when new entrants are hindered or the

data accessible to buyers or producers is poor. In these instances, the government often poses

price controls to safeguard consumers from exploitation. For example, this might happen if

patients could choose medicine without the assistance of medical professionals. Patients might

require government safety from extreme prices for the incorrect medication (Aparicio & Cavallo,

2019). The advanced medical system eliminated these issues by deploying updated experts and

professionals who affect drug selection. Besides, proper price controls can evade market failure,

such as limited entry. However, the challenge occurs in the execution procedure. No organization

or consumer has adequate information to precisely recognize the imperfection, choose the right

price to resolve the condition, and then offer continuous adjustments and enforcements (Rockoff,

2018). Alternatively, governments can attempt to resolve the negative impacts of price controls

using subsidies to the distressed operations. In the context of the medical sector, these subsidies

are used in research and development. This implies that a subsidy might restore the free market

results by reducing research costs.

Impacts of Price Controls

Growth Impacts

The application of price controls might hinder growth in developing economies. Price

ceiling often depresses producer margins and depress local investment and entrepreneurial

operations. They also hinder external investments in such sectors through increasing the nation's

risk premiums that impact international organizations (Stocking, 2010). In the context where
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regulated costs is higher than the level needed for a competitive investment return, preservation

requires hindrance to entry. Price regulations can discourage competition and support high

producers’ margins (Guénette, 2020). Besides, price controls might also change the distribution

of resources within the subsidized sector. This occurrence is often evident within the agricultural

sectors, where output price controls depend on inputs subsidies. However, these policies often

minimize productivity and worsen income disparity. They might also result in the inadequate

usage of subsidized inputs. The guidelines can also severely impact the incentives to employ

advanced technologies that facilitate high productivity (Aparicio & Cavallo, 2019). However,

research shows that reducing price controls and other related subsidies cause enhanced

organizational productivity in emerging markets. Price controls can also distort consumption of

price-controlled commodities and result in severe deficiencies, creating alternative markets with

extreme prices, and substituting low-quality items. Alternatively, producers of the controlled

items might participate in the black market with high transaction costs and no business

regulations (Guénette, 2020). Such situations support the switch to organizations within the

informal sector that evade laws. Cost regulations within the financial industry, such as interest

rate ceilings, can interrupt monetary sectors. These approaches minimize credit supply to safe

debtors and start-ups, increase the degree defaulted loans, minimize rivalry and invention among

lenders, and encourage casual lenders. Price ceilings can elevate disparity by hindering the poor

from accessing loans (Carranz et al., 2011). Similarly, price controls and subsidies on energy

commodities might increase the exposure to global warming.

Policy Impacts

Cost regulations can negatively impact social policies. These deployments of rules

alongside massive subsidies are ineffective in reallocating local income. These approaches are
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often uneven, as wealthy sectors, particularly the urban regions, often gain disproportionately

due to the considerable demand for cost regulated commodities to rural clients and producers

(Guénette, 2020). For instance, grants and cheap costs for liquid natural gas and gasoline are

highly relapsing since only a tiny portion of the aid benefits the most deprived sectors of the

economy. The price control approaches also crate adverse fiscal problems. They pose an implicit

or explicit range of taxes and subsidies that differs with periods, and their execution might need

extra laws to control production and consumption. A structure of price controls on commodities

often expands the burden on fiscal budget, public debt, or producers' gains (Aparicio & Cavallo,

2019). Probable or implicit fiscal costs resulting from price controls are often extreme in low-

income nations because of the general application of these approaches. Similarly, subsidies on

commodities subjected to cost regulations such as oil account for a huge percentage of

government’s expenses. Price controls, particularly ceilings, also impose problems to the

adequate performance of the monetary policy. Monetary policy plays a crucial role in

minimizing inflation rates (Guénette, 2020). The focus is always a transparent approach aimed at

the medium or long term. Problems with monetary policy are severe in low-income countries.

First, the dominant application of price controls obscures inflation targets' selection by failing the

significance of the entire CPI as a computation of the existing inflation pressures. Besides,

fluctuations in significant CPI inflation increase by the high percentage of foodstuff in the low-

income countries. Food costs cause regular massive changes from differences in domestic

harvests and global supply and demand. Secondly, price controls can raise inflation since

governments often respond when experiencing high costs, significantly increasing food prices

(Guénette, 2020). Thirdly, price controls can elevate the tackiness of the inflation procedure as

modifications in regulated costs entail cumbersome regulatory procedures. Fourthly, vital

alterations in controlled costs can severely impact inflation in low-income nations, where

inflation anticipations are weakly anchored. Lastly, price regulations within the monetary

industry, such as interest rates ceilings can minimize the capability of the monetary policy to

impact financial situations.

Distribution of Resources

Price controls also distort the allocation of resources. Economists often understand how

to produce a surplus or shortage. However, price ceilings that hinder prices surpass a given

maximum cause shortages (Murphy et al., 2019). Price floors that restrict prices below certain

minimum cause surpluses for a given period. For example, if the supply and demand for cooking

oil are balanced at the exiting price, the government introduces a lower maximum price

(Rockoff, 2018). The supply of cooking oil will reduce, but the demand will increase. This

occurrence will cause surplus demand and empty shops. Although some clients will acquire the

oil at low costs, mots will miss the commodity.

Demand and Supply

Demand and supply are the key determinants of market prices. Consumer preferences for

a commodity also determine the quantity purchased at a particular period. Clients often buy lots

of items as the prices fall. Organizations often decide the amount they are willing to supply to the

market at diverse prices (Carranz et al., 2011). This implies that if consumers are eager and ready

to pay high costs for products, more producers will attempt to supply the commodity. They will

enlarge the manufacturing capability and perform research to enhance the commodity. Therefore,

high anticipated prices cause high commodity supply. This vibrant collaboration generates a

balanced price in the market. When consumers and producers execute liberally, the price makes

the quantities needed by clients equivalent the amounts supplied by producers (Murphy et al.,
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2019). However, when the government implements a price regulation, it determines the price in

the market and forces most transactions to happen at that price rather than the balanced price

established by the forces of demand and supply. The regular change in supply and demand

originate from costs and tastes, but the regulated price is exposed to diverse factors such as

politics and it will never be balanced. This implies that the controlled price will always be too

low or high.

When the price is exceptionally high, this causes excess amounts of products for sale than

what consumers demand. This is what happens with many farm programs (Rockoff, 2018). As

the government attempts to increase farm revenues through purchasing excess outputs. This

forces farmers to increase more animals and convert additional land to cropland or pasture.

Nevertheless, the high costs hinder clients from purchasing farm products leading to excess

supply. The government often worsens this condition by continuing to buy the extra farm crop at

the approved price. Lastly, severe challenges also occur when authorities set prices below the

equilibrium levels. This makes consumers demand more products than producers can supply. For

example, when the authorities restrict oil price increases, long queues often form within petrol

stations. The consumers who are willing to wait for long while queuing will receive the scarce

commodity.

In both scenarios, severe welfare loss occurs since only inadequate products are sold. The

misused opportunity cause a deadweight loss between consumers and producers since the income

is lost for good. Besides creating the deadweight loss, a temporary high price transfer gains from

consumers to producers. This rent tends to be wasted since producers lobby and other

influencing operations to preserve the controlled price. In the context of low prices, consumers

enjoy more profits (Rockoff, 2018). While competing for a few regulated commodities,
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consumers often waste more resources to acquire low-cost products. For example, individuals

who wait in the gas lines likely bore many charges from the wasted time quieting as they saved a

lot from the gasoline price controls. This implies that gas lines cost consumers much than they

save from gas prices. Therefore, the fictionally low costs hurt both consumers and producers.

Alternatives to Price Controls

Most economies have used price controls to lessen the effect of commodity price

fluctuations among the most vulnerable people in the community. For example, the application

of temporary stabilization funds assists in safeguarding local consumers and organizations from

extreme prices in essential products within the global markets. Nevertheless, most economies

face challenges in designing structures that generate long-term gains. In the long-run, price

stabilization approaches often cause expensive and distortionary subsidies, imposing robust

growth, development, and macroeconomic policy (Guénette, 2020). This implies that alternative

policy approaches might be operational in attaining economic goals. Substituting price

regulations with enlarged and focused social approaches alongside operational restructurings can

support the vulnerable and enhance growth. Notably, approaches to reduce prices that emphasize

price controls cause high per capita. This results from savings produced by subsidies can finance

diverse economic operations (Stocking, 2010). The elimination of price controls should

incorporate targeted support for the sectors of the population that experience extreme difficulties.

Although price regulations reverts market abnormalities, less-privileged families spend a large

portion of their incomes on commodities subjected to price regulations and cause massive

income losses when the controls are removed (Rockoff, 2018). Besides, enhancing the

competitive environment effectively reduces costs to clients and producers by deploying

controls. Robust approaches and consumer regulations are vital for institutional structures that
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facilitate market approaches (Guénette, 2020). A robust legal and regulatory system that favors

competitive markets effectively responds to the price controls' diverse challenges. For instance,

eliminating price controls and entry hindrances increases rivalry and lowers costs in various

economies.

Conclusion

Although price controls safeguard consumers and producers from exploitation or losses,

they disrupt the regular operation of demand and supply market forces. This distortion causes a

shortage of commodities resulting in high prices. It also forces producers to reduce product

quality, and consumers’ waste a lot of time searching for the products. Besides, cost controls

impact the performance of financial policies by eliminating the CPI. The controls also discourage

investments and innovations and encourage operations in the black market that lack proper

regulations. This implies that governments should replace price controls with flexible approaches

promoting social protection or encouraging competition to crate market fairness. Therefore, price

controls have negative impacts on the developing and hinder their growth.
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References

Aparicio, D & Cavallo, A. (2019). Targeted Price Controls on Supermarket Products. Retrieved

from https://www.hbs.edu/ris/Publication%20Files/Cavallo_Alberto_J1_Targeted

%20Price%20Controls%20on%20Supermarket%20Products_94364f54-361a-4cf3-94fa-

b77a10b0b32c.pdf

Carranz, J. et al. (2011). The Effects of Price Controls: Evidence from Quebec's retail Gasoline

Market. Retrieved from

http://cpp.hec.ca/cms/assets/documents/recherches_publiees/PP_2010_05.pdf

Guénette, J. (2020). Price Controls Good Intentions, Bad Outcomes. Retrieved from

https://documents1.worldbank.org/curated/en/735161586781898890/pdf/Price-Controls-

Good-Intentions-Bad-Outcomes.pdf

Murphy, F. et al. (2019). Measuring the effects of price controls using mixed complementarity

models. European Journal of Operational Research, 275(2): 666-676

Rockoff, H. (2018). Price Controls. Retrieved from

https://www.econlib.org/library/Enc/PriceControls.html

Stocking, A. (2010). Unintended Consequences of Price Controls: An Application to Allowance

Markets. Retrieved from https://www.cbo.gov/sites/default/files/111th-congress-2009-

2010/workingpaper/pricecontrolscaptrade_0.pdf
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